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April 12, 2018

Why the Flash Sale Model is Dead in Hospitality

By Max Starkov

Background

Groupon and other flash sales sites appeared as a recessionary phenomenon rather than a new, emerging distribution channel that was here to stay. Since the recession, as the economy improved, many of these flash sales sites went out of business, including Amazon Local and SniqueAway. Groupon, as one of the only remaining players in the flash sales arena, has a severely diminished role in hospitality.

Why have most flash sales sites disappeared?

Social buying and flash sale sites such as Groupon, Amazon Local, and SniqueAway were at one point an integral part of the economy and the supply-demand market equilibrium. For social buying and flash sale sites to exist, there must be market equilibrium (price-quantity) between the demand side (quantity of members/engaged social buyers) and the supply side (quantity of fresh, intriguing deals).

Since travel consumers and customers in general (the demand side) are always open to discounts and deals of any sort, an increasingly important part of any social buying/flash sale site is its ability to convince the supply side—i.e., hotels—to run deals and accept the large discounts that are integral to the offers.

As travel demand improved, hoteliers became exceedingly reluctant to participate in social buying/flash sale sites because of their “open discount” business model, which in most cases is in breach of the rate parity provisions with the OTAs. In addition, with the economy improving, hoteliers focused on better and cheaper distribution channels to fill occupancy. All of this deprived the supply side of the equation with fresh, intriguing deals. As a result, both sides of the equation suffer and shrink. Online travel consumers, disappointed by the lack of fresh and intriguing hotel deals, reverted back to the traditional booking channels: hotel direct, OTAs, GDS, and voice.

Why should hoteliers be wary of using Groupon and other social buying/flash sales sites?

Here are only a few of the reasons that the economics do not work for the hospitality industry:

Hoteliers should be aware of the existence of “The Law of Unintended Channel Share Loss,” which stipulates the following: Any booking via the most discounted channel (i.e., Groupon and other flash sales sites or an OTA) is one less booking for the same hotel via the hotel website, call center and GDS (in that order).

Groupon has a flawed “Open Discount” business model in which the property discounted rate is out in the open, which is against rate parity provisions in the property contracts with the OTAs and many corporate travel agreements, and destroys rate integrity.

The lack of opaqueness establishes new lower market price: The property cannot charge the rack rate since travel consumers have seen and accepted the discount rate as the new market value.

The cannibalization of the existing customer base: 65% of flash sale buyers are already frequent (38%) or infrequent (27%) customers, according to ForeSee research.

Groupon artificially balloons the face value of the flash sale deal to show value (e.g., the regular price is $400, but you are getting it on Groupon for only $150). This puts off potential customers by positioning the hotel as “too expensive.”

Steep discounts of 30-50% are simply unacceptable.

So, should hoteliers “flash or not flash” on Groupon or other sites?

The answer is a categorical NO! As mentioned above, the economic model of social buying/flash sale sites does not work for the hospitality industry. The flawed open business model destroys rate parity and establishes a lower market price. The deals cannibalize hotels’ existing customer base while putting off potential new customers with artificially ballooned deal face values.

Part of NextGuest Technologies, HEBS Digital and Serenata CRM, the most comprehensive Hotel CRM Suite today, are the creators of the hospitality industry’s first Fully-Integrated Guest Engagement & Acquisition Platform.